Insider Trading: 5 Things Men Should Know

Few movie lines define a Zeitgeist better than Gordon Gekko's "Greed is good." The flurry of alliteration — slapping G's upon G's — is surely no mistake, as it's about money. And lots of it. How good was greed for one of Gekko's inspirations, Wall Street arbitrager Ivan Boesky? When he was finally busted, Boesky was fined a whopping $100 million by the Securities and Exchange Commission (SEC).

And he paid it.

On February 8th, the SEC filed a formal complaint alleging more greed in the form of insider trading, this time against a so-called “Expert Network” that trafficked insider information from tech companies like Dell and AMD to financial advisors. They allege it works something like this: Midlevel employees privy to "detailed, company-specific information about earnings, sales, top-line revenue, product orders, and other similar material information" sold the information to hedge fund managers, who then turned around and traded on it to the tune of some $30 million.

According to former SEC Chairman Arthur Levitt, insider trading "has utterly no place in any fair-minded, law-abiding economy," but there may be more to this action. As an equity trader at one of the world's largest investment management companies told us, "No politician wants to get in the way of a bull market with reasonable regulation, but when things come crumbling down, everyone wants scapegoats. In the wake of the financial crisis and particularly the failure to nab Bernie Madoff sooner, it's easy to suspect that the SEC was under pressure to regulate something — which meant producing some scalps."

As yet another Wall Street insider trading scandal unfolds, we present five things men should know about insider trading.

1- Most insider trading cases involve low-level employees

The first thing men should know about insider trading is that $30 million is not normal — it's just good for headlines.

Although we associate insider trading with the unscrupulous making of millions of dollars such as is outlined in the current SEC complaint, the reality is that most cases pursued by the SEC don't make headlines because the dollar amounts are so small. More often than not, the cases involve low-level employees who are found to be making unusual stock transactions right before a major event, such as a merger, earning the employee no more than few thousand dollars.

Insider trading cases are notoriously difficult to prosecute successfully, which may help explain why, between 1934 and 1979, the SEC pursued just 53 cases — a figure equivalent to its annual case load today.

2- Insider trading is not always illegal

The SEC — not always the most opaque of agencies — is very clear about this: There is illegal insider trading, and then there's the legal variety.

To quote from the SEC's website, "the legal version [of insider trading] is when corporate insiders — officers, directors and employees — buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC." In fact, those insiders aren't limited to officers and employees; the term extends to include "any beneficial owners of more than 10% of a class of the company's equity securities registered under Section 12 of the Securities Exchange Act of 1934."

This is in place to prevent insiders from making short-swing profits — profits seen in any time frame shorter than six months from the company's own stock.

We have three more things you should know about insider trading next...